Shares of Sun Microsystems ( SUNW) were recently down 6.4% Tuesday after Banc of America downgraded the shares to neutral, saying it's doubtful that the company will be able to stabilize its core server business this year. Of late, the stock was off 30 cents to $4.36. Only two months earlier, Banc of America upgraded the stock to buy, based on the assumption that Sun had hit bottom and begun a turnaround. But analyst Keith Bachman said in a note Tuesday morning that he's now begun to worry about weakness in Sun's Unix server line. Checks with hardware distributors suggest that Sun is struggling this quarter, Bachman wrote, even as business for rivals Hewlett-Packard ( HPQ), IBM ( IBM) and Dell ( DELL) appears to be tracking in-line with expectations. "We are not sure the
bad news is even fully in Sun's stock, especially given that we believe that investors are looking for improved financial performance, not a deterioration in financial performance," he wrote. When Bachman upgraded the stock in January, he believed Sun would get a boost from its foray into servers based on standardized chips from Advanced Micro Devices ( AMD). Tuesday, the analyst wrote that the partnership with AMD "may offer too little too late." "While we believe that the new AMD products will be well received, the price points and margins for x86 products will not compensate for renewed weakness in the Unix market and/or renewed share loss by Sun," he added. Making matters worse, Sun has refused to aggressively cut costs, which could help offset some of the sales weakness, Bachman noted. "Sun chooses to lightly trim, and lose money, rather than focus on aligning its cost structure to the realities of the current market, in our view." The financial takeaway: Bachman lowered his EPS estimates for 2004 from a loss of 4 cents to a loss of 9 cents, citing expectations for lower revenue and margins. Consensus estimates assume a loss of 6 cents a share for the calendar year, according to Thomson First Call. The downgrade comes only a week after ratings agency Standard & Poor's cut Sun's $1.3 billion of outstanding debt to junk status . Among the reasons, S&P cited Sun's "weak and inconsistent profitability, and our expectation that Sun will be challenged to profitably expand its market presence."